June 12, 2017

“I think people will interpret membership of the single market as not respecting that referendum.” – John McDonnell

You can’t build a rocket to reach the Moon without understanding the laws of physics. In politics, as in many other fields of human endeavour, we are most likely to succeed not through raw emotion, but when our goals are aligned with logic and a clear understanding of the real world. Thus, political projects have for centuries been informed by the carefully crafted logical, evidence-based arguments of thinkers from Adam Smith to Karl Marx.

Somewhat more parochially, the UK will only resolve its Brexit conundrum by finding a solution that works in practice, not just in the fevered imagination of one or other political leader.

Why do I say we’re in a “Brexit conundrum”? Surely we’ve voted for Brexit and should “just get on with it!”. Well, no – putting the hard-line “Remoaners” to one side for the moment – it’s not quite as simple as that: the argument now is apparently over whether we have a “soft Brexit” or a “hard Brexit”. Oh well, I hear from the gallery, we were going to have a “hard Brexit”, but Theresa has put her expensively shod foot in some seriously pungent doo-doo and now we’ll have to have a “soft Brexit”.

Yes, it seems to have turned out that a “hard Brexit” is not a politically viable option, though David Davis and Liam Fox are still in denial. Nor is a “hard Brexit” economically viable, I might add. Never mind, “just get on with it!!”, say the great British public: we’re more concerned about the NHS and inequality anyway.

Unfortunately, it’s still not quite as simple as that.

Why? Because a “soft Brexit” is not a logically viable option. If it was, Theresa May would probably have proposed it already, since, contrary to popular belief, she and her advisers are not entirely stupid. No, it turns out that, no sooner have you pulled on one loose thread of the UK’s relationship with the EU, than you’re standing in front of the nation completely starkers, as Theresa May hinted during the election campaign.

For example, if we go “hard” and leave the European customs union, then, for starters, there’s a border problem in Ireland, not to mention with Gibraltar. Huge bureaucratic costs arise for business, plus we revert to WTO tariffs on all our trade until we can negotiate something different. Enough! Let’s stay in the customs union, then, you say. Oh, but then we wouldn’t be able to negotiate our own trade deals. We need to do that to offset leaving the single market. And trade is kind of important because we need to import stuff. Like food.

OK, then, let’s stay in the single market. Ah. But then we’d retain free movement (I know I am on record as thinking that’s a good thing, but I’m trying to be detached and objective here). And, incidentally, be subject to the European Free Trade Area (EFTA) court, which apparently doesn’t violate our precious sovereignty as much as the European Court of Justice (ECJ), though I’m not sure the great British public would be fully appreciative of the fine distinction.

Hmm, surely we can remain members of uncontroversial European agencies, Euratom, perhaps? Nope, sorry, not unless we submit to the authority of the ECJ (which Labour don’t happen to feel is worth mentioning in their manifesto, I note), assuming we haven’t already done so by trying to stay in the customs union.

So the dilemma facing the nation’s glorious leadership cadre is to propose either a “hard Brexit” – which might not have got through the Commons even before the General Election and would lead to years of economic chaos and decades of underperformance – or opt for a “soft Brexit”, which would involve remaining in the single market and customs union, but also mean retaining the ECJ and free movement, and (presumably) land us with the same £50-100bn bill as hard Brexit would, as well as no influence over the single market and customs union rules nor the ability to negotiate our own trade deals.

In other words, dare I say it, if we don’t have a “hard Brexit” we may as well stay in the EU.

This is the logic trap in which we find ourselves.

This is why the Labour Manifesto, as David Davis correctly points out, pretty much paraphrases the Tory government’s Brexit White Paper. Labour write:

“We will scrap the Conservatives’ Brexit White Paper and replace it with fresh negotiating priorities that have a strong emphasis on retaining the benefits of the Single Market and the Customs Union.”

“The [government’s] white paper [die!, evil capital letters, die!] reiterates that the government aims to secure ‘the freest and most frictionless trade possible in goods and services’ with the EU outside the single market and via ‘an ambitious and comprehensive free trade agreement’.

[The Tory government] also wants to be outside the customs union, so it can negotiate its own trade deals, but would like ‘a new customs agreement’, which should be theoretically possible thanks to new technology. … [No kidding, this really is their argument]

… [T]he UK will not seek to adopt an existing model used by other countries, but try to ‘take in elements’ of the single market in certain areas – in other words, bespoke deals for important business sectors. From the EU perspective, all this is ambitious: it sounds suspiciously like cherry-picking.”

Of course, Labour’s presentation during the election campaign was very different to that of the Tories, emphasising that they’d prioritise the economy over immigration, for example, but in essence both are just nuanced versions of Boris claiming he can simultaneously have his cake and shove it into his stupid gob, spraying crumbs and spittle in all directions.

October 27, 2010

I’ve just watched today’s Prime Minister’s Questions (PMQs) on iPlayer (warning: programme will probably not remain permanently available), because it’s simply not clear what aspects of the Coalition government’s benefits cuts programme Labour opposes. It was ugly: the problem is Ed Miliband didn’t stick to the point. There is a chink in Cameron’s armour, but Miliband missed it. If he’d thought through his position rather better you feel he could have skewered the bastard.

The point is, if you watch the Guardian’s PMQ clip, Miliband appears to be latching onto the vindictive proposal to reduce Housing Benefit (HB) by 10% after someone has been on Jobseeker’s Allowance (JSA) for a year.

I’d thought Chris Bryant had been off-message when he took on Clegg over the £400/week limit on HB, which could force people out of central London. Clegg did that old trick of ignoring what was asked and taking offence at the manner, suggesting Bryant had dissed those “ethnically cleansed” around the world. Bryant said “sociologically cleansed” so Clegg was just being a prick. I don’t like to use bad language on this blog, but I’m making an exception for the Deputy PM. Anyway, back to the story. Unfortunately, in PMQs, Miliband let Cameron talk about the £400/pw limit rather than the 10% reduction.

Labour is defending the indefensible in opposing the £400 limit and should be supporting it. The 10% cut is a different matter altogether.

It’s depressing to see Labour in complete disarray in the face of the Tory onslaught. All we’re seeing is uncoordinated rearguard action. Ed won’t last long if they carry on like this.

The point is there are different motivations for different aspects of the welfare reforms. Some measures are to restore fairness and others to reduce the overall cost. There is an element of financial sleight of hand. But there is also an attempt to punish the unemployed, and that is simply out of order. Ugly, Cameron, ugly. With around 1.5m on JSA already and with 500,000 civil service job losses to come, as well as transfers from disability and incapacity benefit, there are bound to be some people who don’t find work within a year. Sure, some of these will be people who tried less hard than those who found work, but the point is not everyone will find work, even if all applied the highest standard of diligence in looking for a job.

So what are the main changes and their rationale? Which should Labour oppose?

1. Reassessing disability and incapacity benefit claims

Labour was doing this anyway. The Tories are not outflanking Labour though are giving the impression of doing so. To be honest, both parties are cynically preserving votes, since there’s actually no reason why you need more money if you’re disabled. The benefit should be the same as JSA, unless extra funds are needed to overcome specific disabilities. I caught a Radio 5 phone-in this morning and none of the callers fell into such a category. RSI (“carpal tunnel syndrome”), chronic migraines and depression are unpleasant conditions, but do not in themselves result in expense. The point is that paying more money gives people an incentive to label themselves as ill, which is in neither the public nor, arguably, their own interest.

2. Limits on the maximum HB that can be claimed

This depends on the number of bedrooms you’re assessed as needing. The maximum (for 4 bedrooms) is £400/pw (the other limits are “£340 for a three-bedroom property, £290 for two bedrooms and £250 for a one-bedroom property”). This is more than many working people can afford, so there is overwhelming public support for the limit for the unemployed. And the Tories are milking it.

But employed people can also claim HB. The answer to the case of the caretaker cited by Polly Toynbee is to demand a higher minimum wage in London (see my previous post), not to oppose the HB limits. As I said, Labour is in disarray.

There are serious questions to be asked, too. And Labour isn’t asking them. People on high rents are going to run out of money very quickly. Is the government saying, for example, that if someone is made unemployed and they happen to be renting somewhere for more than the limit they’re entitled to – not difficult in London – or have two bedrooms when they’re only entitled to one, that they have to move immediately, or at least before any savings or redundancy payment run out? The additional disruption is hardly conducive to rapidly finding new employment, is it?

3. An increase in rents for new social housing tenancies to 80% of the market rate.

4. Paying HB only for rents up to the 30th percentile for the area rather than the median.

It’s crazy that it was the median in the first place. Over time, this must simply push up rents in general, since with HB-funded demand, any properties offered up to the median price will be let quickly (so no incentive to mark them down), whereas those marketed at an above-median price might find a tenant before they have to be marked down. The median will steadily increase even if supply and demand are balanced. It’s possible even the 30th percentile might not be enough to prevent this effect (since properties private tenants would pay less than the 30th percentile rate for will let to HB tenants at the 30th percentile rate).

5. And then there’s the 10% HB punishment if you don’t find a job in a year.

This makes absolutely no sense to me. HB is supposed to be a payment in kind. It’s to pay the rent. If it’s reduced, then something’s got to give. And apparently there’s more: I start to appreciate Polly Toynbee’s indignation:

“But that’s not all. The sum paid towards the rent will fall every year, in perpetuity: it will no longer rise as average local rents rise but will be pegged to the consumer price index. If that had happened in the last decade most people would have been priced out: rents rose by 70%, but the CPI only rose 20%.

Now add in something more sinister. Council tax benefit, worth an average £16 a week, is to be cut by 10% and then handed over to each local authority to decide how much benefit to offer: if some councils want to push poor people out, they can pay virtually nothing to their residents.”

This makes no sense. I can understand the idea that you’ve got no job, the state covers your main outgoings (rent, Council Tax) and gives you £65/wk to manage the rest on. But £65 seems pretty much a bare minimum for food, heating, clothing and so on. Playing games beyond this point is simply vindictive. To see someone of Cameron’s privileged background doing so is, frankly, a rather disgusting sight.

So, Ed, you need to inject some clarity into Labour’s position. You’re going to have to give up some ground. Most of what the Coalition is doing makes sense. But punishing the unemployed doesn’t.

And come up with some alternatives. A higher minimum wage to increase the incentive to work. And a higher minimum wage in expensive areas, such as central London than elsewhere.

Most of all, please, please read the blogs and stop defending Housing Benefit of more than £400/wk!

Over the last few decades, here in the UK, we’ve become very good at pointing to apparent failure. Often despite considerable objective evidence to the contrary. Apparently we’re no longer any good at making things (compared to Germany and China, maybe, but not to most other countries), our armed forces are puny (compared to the US, maybe…), our energy supply is insecure, our public services are falling apart, the English Premier League is in a mess… Such angst is spreading elsewhere in the West, but somehow you rarely hear fundamental criticism of our political and economic system. You’d think the political process was merely flawed, a little unfair in places, perhaps, a little too tolerant of peccadilloes by the powerful, but basically sound, and very difficult to improve. Despite considerable objective evidence to the contrary.

The issue, in a nutshell, is the extent to which the state should pay to provide some people with a standard of housing higher than they can afford on the open market. The 1997-2010 Labour government (supported by at least the non-Tory controlled local councils, who have executive powers in area of housing), was quite enthusiastic about doing so, though in the main merely continued existing policies. As time has gone on, though, the provision of housing to some by the state has been a factor in driving those not eligible for, or simply not claiming, state support, into less desirable – smaller, and often, crucially, less conveniently located – accommodation. It should be noted that Labour’s attempts to increase the supply of housing over recent years has been effectively stymied by nimby campaigns, if not supported, then at least not effectively challenged by foot-dragging Liberal and Conservative local councils. Despite guilt all round, the new Coalition government has decided to address the problem, in part, I suggest, as part of their strategy of blaming everything on Labour. And in that regard, housing is pretty much an open goal.

As the debate continues, we see not one but two failings of our political system in stark relief.

The first failing is a confusion: are we making policy on the basis of reason or emotion? Let’s take people who aren’t working for whatever reason (unemployed, incapacitated or retired). Now, I’m not even going to argue this on the basis of rights. It simply makes no sense, as hundreds of bloggers have pointed out (to massive approval, judging by “Recommendation” statistics), for workers to commute in every day from the outskirts of conurbations such as London, whilst people who don’t actually need to live there are paid to do so by the state. Why, oh, why does Labour defend the indefensible? (Link to where Polly Toynbee explains the Coalition’s inhuman proposals – remember we’re essentially taking about a zero-sum game, here: what we give to one household, we deny to another).

But – there’s always a “but” – there are “priority cases” as a Councillor Timothy Coleridge (Tory, Kensington and Chelsea) explained on Radio 4 this morning trying to “soften” the policy. There’ll be a “transition fund”, we were told. He seemed to be particularly sympathetic to the elderly. So it seems we’re going to make value judgements.

It might be worth digressing at this point to note that gerrymandering is a factor, because of first-past-the-post local elections. Politicians want to keep their voters in their constituency and move the opposition’s out! I suspect the Tories see the elderly vote as key to their next few terms in office, so I was immediately suspicious of Councillor Coleridge. Any “prioritisation” must surely be done according to an objective, nationally applicable set of criteria. Trouble is, value judgements are why we’re here in the first place.

If the policy is to minimise the fiscal cost of housing benefit, and optimise the use of housing, then that’s what we must do.

“The house was lovely, built to Labour’s postwar housing standards (later abandoned by the Tories). Us kids grew up and moved on and my parents stayed there until my mother died in 1998, 50 years after they had moved in. My father died three years before her. Yes, the house was too big for her, but she liked to invite her children, grandchildren and great-grandchildren to stay.” [my stress]

This partly explains how we’ve reached the present situation. This identifiable individual (Ann Tobin’s mum) “liked” her big house, provided by the state. Meanwhile, there is a waiting list of millions of families for such houses. Maybe, because Ann Tobin’s mum was allowed to keep a house she liked, a family with a couple of school-age kids spent years moving about between emergency B&B accommodation to temporary lodgings. Maybe that family would have “liked” a house of their own. Because Ann Tobin’s mother has been allowed to stay in a family house, another family that can’t be precisely identified is living in poor or insecure accommodation. This is crazy. Housing supply is limited (though could be improved). Why is it so difficult for people to understand that because of that limitation one decision impacts on others? In areas with a limited supply of housing, its allocation is a zero-sum game. You can’t give some people a place they’d “like” without denying others the same thing.

To my mind what we’re witnessing is the complete failure of post-war housing policy in the UK. Council housing, for example, makes no sense. It locks in housing allocation at one moment in time, making no allowance for the changing world we live in. Or the changing size of individual families for that matter.

This brings me on to the second failing of the political system. Politicians see direct action by the state as the only way to achieve anything. So we’re told we have to build more social housing. Wrong. We simply have to build more housing, period. 100,000 private homes will house 100,000 households just as well as 100,000 social homes will. 100,000 fewer households will be waiting for housing in either case.

And in actual fact, over the last decade or so, demands for social housing have actually reduced the total provision of housing. Why? Because the main way social housing has been provided has been through Section 106 agreements with housing developers. In this daft system, housing developers have been given planning permission in return for including schools, hospitals or social housing in their schemes. And you thought schools, hospitals and social housing all came out of the health, education and housing budgets? This tax on developers, or first-time buyers, however you want to look at it, has the effect of reducing housing provision. At a given house-price level, building houses is less profitable than otherwise would be the case, so fewer invest in that activity than in other opportunities. Fewer houses get built, house prices rise, and more prospective purchasers find themselves on social-housing waiting lists. Section 106 agreements to provide more social housing because it’ll be needed are, in aggregate, self-fulfilling!

I can’t even bring myself to discuss how shared equity schemes and other devices to subsidise house purchases simply push up the general price in the market.

The solution seems to me blindingly obvious, so I’m going to cut to the chase (a phrase, incidentally, that grated when used by Bob Hoskins in Made in Dagenham, since it wasn’t in general usage in 1968 when the film was set – I remember first hearing it in 1994).

We’ve simply got to manage the relationship between wages, at the low end, and house prices so that working people can afford to house themselves and their families. The implication is that there needs to be a higher minimum wage in areas where housing is expensive. It is simple exploitation to be paying the national minimum wage in central London, because there are only a limited number of possible outcomes. Either workers commute in which case they spend more time and money than if they were working near their home; or living-standards drop and people end up sleeping in shifts; or benefits are necessary to top-up earnings, subsidising employers and consumers in expensive areas. Ideally, employers would have to pay more in expensive areas, but the labour market is, has been for some time, and will be for some time, a buyers’ market. Indeed it is government policy to force people to take any job they can get.

What a mess! State provision of housing has led to a situation where the minimum wage is nowhere near a “living” wage. Perhaps that’s a bit strong: rather, state provision of housing and other benefits has provided a safety-valve so that pay has been allowed to become gradually lower and lower relative to socially accepted minimum living standards.

Maybe some blame should be apportioned, in order to unravel some of the mystery how we arrived in this absurd situation.

First, there are those, almost all in the Labour Party, but not all of the Labour Party, who believe it is right that the state provides housing and benefits on the basis of need. “Capitalism” is so “unfair” that the state must step in. As I’ve mentioned this policy has failed.

Second, there are those in all three parties who take a position I would characterise as “hand-wringing liberals” who make no attempt to analyse the problem and produce a complete policy. They just want to address the problems of those with whom they empathise. The trouble is, as I’ve also already said, with limited supply, allocating a house to Mr Jones simply moves Mr Smith onto the waiting list. As a rationalist this is the position I detest most of all. Government has a duty to find as solution for everyone, not self-righteously apply sticking-plaster where they most easily can.

Third, there are those in all three parties – since many of the individuals concerned have a vested interest in the form of their own properties – who explicitly or tacitly believe the natural order of things is for people like themselves to own their own homes, ever-rising in value, and that there must necessarily be “the poor” who don’t deserve or are incapable of having the same thing. Explicitly in the case of some Conservatives… heeeere’s Boris!:

“Better a stagnant housing market, [those arguing for an end to housing speculation] will say, than another great boom and another great bust. Which is all very well, in theory.

In practice, it looks as if flattening off the housing market is both risky in the short term, and unachievable in the long term. The sad truth is that it is still psychologically essential to the British middle classes to have a sense that our principal asset is gently appreciating in value, or at least that it will over the long term.”

Stark-staring bonkers, of course.

Houses simply can’t appreciate in value indefinitely compared to other goods and services. The world doesn’t work like that. Eventually house price rises will become self-defeating: even if they don’t stimulate more new-build supply (because of self-interested nimbyism); or inflation, causing interest-rate and hence mortgage increases; they’ll eventually act as such a drag on the economy that activity moves elsewhere – abroad, most likely – and housing demand and prices fall.

Those who buy into the view that the increasing value of their home represents a permanent increase in wealth support the ongoing British class division implicitly. What they refuse to countenance is entirely feasible: it is possible for everyone in work to own their own home, or rent at a market rate, if they prefer the flexibility they gain that way.

So the three stooges are “Old Labour” socialists, who don’t believe markets can ever be fair; bleeding heart, sawdust-headed “Liberals”; and divided nation, blue-blood-is-just-better “Conservatives”.

It doesn’t have to be this way. Instead of accepting capitalism as it is (“Conservative”), or rejecting it (“Old Labour”), or ooh, poor little kitten! (“Liberal”), we can make capitalism fairer. A much higher minimum wage, relative to local house prices, would solve many of the problems that are causing such angst.

March 24, 2010

As ever, none of the foregoing should be taken as financial advice – if you want that you’ll have to consult a professional – but I’ve noticed that a few people have recently found themselves in Uncharted Territory after searching for information about Lloyds shares. I hope they aren’t trying to decide what to do about the rights issue because that’s long since all been and gone. Maybe what people are looking for, though, is a conversion of the current share price to the pre-rights price.

Back in November I discussed the theoretical ex-rights price (TERP) in a number of posts. The bottom line is that prior to the rights issue Lloyds shares were trading at around 90p, but the effect of the new share issue meant that following the rights issue they would be expected to trade at around 60p.

60p would represent a “par” performance. If demand for the shares increased following the rights issue – as a result of some good news, perhaps – then they’d trade at a higher price.

The question is what price would Lloyds shares have had to be trading at for the TERP to be 64p?

This is easily calculated. We simply (1) multiply the current share price by the number of shares in circulation following the rights issue (but see Note 1 below), (2) subtract the funds (£13.5bn) raised by the rights issue (see also Note 2), then (3) divide by the number of shares before the rights issue.

Obviously Lloyds share price tomorrow might be 65p or 63p, so a general calculation is needed.

Obviously, too, we could devise a formula, but it’s also simple to put a few columns in a spreadsheet and plot a graph:

So if Lloyds’ share price were to reach 70p, this would be very roughly equivalent to 115p before the rights issue.

The whole point of this exercise, of course, is that knowledge that there was an upcoming rights issue may have depressed the Lloyds share price before the rights were even issued. The additional issue of shares would be expected to depress the share price – supply and demand – and market participants may have anticipated this and sold some of their holdings in advance.

The following graph from Yahoo! Finance shows how Lloyds’ share price was trading in the run-up to the rights issue last November:

So, based on my calculation, the Lloyds share price at 64p is very roughly still in a range equivalent to the 100p at which pre-rights shares were trading at roughly at the start of last October.

Hope that’s helpful and feel free to point out any errors or criticise my assumptions, in particular those in the two Notes below.

———–
Note 1: My calculation ignores the further share issue since the rights issue. This diluted everyone’s holdings (including that of the Treasury, from 43% to 41%). It complicates the comparison of pre-rights and post-rights share prices, but because the latest issue was not at a significant discount I’ve assumed the effect can be ignored for a very approximate calculation.

Note 2: Only £13bn of the £13.5bn was available to the bank following the rights issue, which (scandalously) cost £500m. This is a complicating factor when comparing the post-rights price with the share price before the issue was announced. Personally, I’d be inclined to regard the £500m as money down the drain. The calculation, though, assumes it was money well spent and that shareholders received £500m of value for their £500m cash.

Yesterday’s NYT includes a right royal spat. Well, online it does, at least. In a piece titled Cap and Fade, James Hansen argues that carbon taxes would be more effective than cap and trade. Paul Krugman responds under the heading Unhelpful Hansen, by first telling Hansen to stay off his turf. Climate scientists shouldn’t dabble in economics, apparently. Tosh. Ideas have to stand on their own merits.

Having highlighted the intellectual ring-fencing which is at the root of many of the world’s problems, Krugman proceeds to un-blot his copy-book. He points out very convincingly that, from an individual consumer’s point of view, it matters not a jot whether gasoline is more expensive because of a tax or because of a cap and trade mechanism.

Krugman is right as far as it goes. But both Hansen and Krugman fail to mention the second, third and fourth order effects of pricing carbon emissions. And it is the second, third and fourth order effects that will determine the effectiveness of policy.

Let’s start at the end, because it’s more fun. The fourth order effect of pricing carbon will simply be a redistribution of spending power in the economy. I’m sure I’ve said it before, but I’ll say it again: money is just a means of distributing resources. The economic system will adjust so that the available resources are used.

Perhaps I should try to explain a little further. Money circulates. There is not a fixed quantity. Let’s imagine we put an astronomical tax on carbon. The money raised by that tax must be spent. Let’s say we decide to spend it on more doctors. Suddenly there will be more doctors to fly off to junkets round the world. Or maybe they’ll spend their money on art (or more expensive houses, or televised sport…). In which case the previous owners of the art (or houses, or sportsmen, their agents and other freeloaders) will be able to afford to fly more…

But before we even get to this unhappy state, we should consider, first, a second order effect of pricing carbon. Pricing carbon will tend to reduce the price of fossil-fuels. All that might happen is that the price of petrol at the pump remains the same, but less of the motorist’s money ends up going to the oil-producer and more goes to the government. Maybe a good thing in itself, but we’re trying to stop global warming here, not change the shares of unearned spoils divided with the Saudis. Sure, depressing the global oil price might have the desirable third order effect of reducing investment in the most expensive fossil-fuels for a while (until the lack of supply pushes prices up again), but we need to reduce consumption of fossil-fuels that cost virtually nothing: coal, in particular.

And unfortunately the second order effect of carbon pricing on the oil price is dwarfed by the third order effects of another second order effect. The second order effect (I’m trying to be rigorous, here!) is that taxes raise money. So does carbon trading. We need to consider the effects of how that money is spent.

Hansen argues that the money should be distributed to the population. This will, at least in the short-term, increase equality. And, unfortunately, when you’re trying to reduce consumption of mass-market products, equality is not your friend. Money will be taken from those whose consumption is not constrained by their financial situation and given to those who would like to spend more. Likely on heating, driving, flying and so on. Oh dear!

But there are problems with carbon trading, too. The precise outcome will depend on how carbon permits are distributed. If they’re given away to power companies, then any excess permits will accrue to these companies’ shareholders in the first instance. (Over time, these profits will encourage new market entrants, although this may not happen if only incumbents are able to access the permits). If permits are auctioned, though, then we reach a situation similar to the carbon tax. The outcome depends on what the government does with the revenue. Simply distributing it to the population would fall foul of the same equality problem as for the tax. Direct or indirect subsidies for renewable energy production would clearly be by far the best policy choice, in the hope that, once renewable energy has a huge cost advantage over fossil-fuels, everyone will switch to clean energy. Maybe.

In perverse support for Krugman’s argument that taxes and cap and trade are equivalent, government could spend tax revenues in the same way as those from auctioning permits. Very similar to Hansen’s position is the idea of tradeable personal carbon allowances. These would have the effect of transferring wealth from the rich to the poor. And remember, equality is not our friend…

Let’s make some tentative conclusions and observations:
1. The indirect ramifications of carbon pricing policies are more important than their immediate effects.
2. Carbon trading is philosophically preferable to carbon taxes, because it at least imposes a limit on total consumption. The problems arise from leakage (the concept is explained in a previous post). Unfortunately, these are very big problems – probably deserving a post of their own.
3. If there is a limit on the carbon price in a carbon trading system, then it becomes almost equivalent to a tax. However carbon is priced, governments must be prepared to push the price up indefinitely. Otherwise, I suggest, the economy will simply adjust to the price.
4. Carbon trading is a superior policy if you’re really serious about reducing fossil-fuel emissions, because government doesn’t have to set a tax at an eye-watering level. It can simply say: “this is all the fossil-fuel we can afford to burn, it’s supply and demand in the market-place which has pushed the price up.”

Unfortunately, I don’t see too many governments around the world that are about to bite the bullet and set an effective carbon price.

“China raised electricity rates for businesses and industries Friday, part of a long-term effort to adjust prices to reflect costs and promote energy saving as the country struggles to meet soaring demand.

The 5.7 percent increase was the first rate-hike since July 2008, when electricity tariffs for nonresidential use rose 5 percent. Residential electricity rates have remained stable since a 1 percent hike in July 2006, but a residential rate increase is planned for early next year, China’s main planning agency said in a notice late Thursday.”

So far, so good.

The story even goes on to report that:

“Rates for residential users will be adjusted to charge more to heavy users, while keeping the costs for those who consume little more or less unchanged.”

Amazing what an all-powerful state can do! And sensible, I suppose, if you’re into social engineering.

But there’s a kicker:

“Friday’s hike raises the tariff for industrial and commercial customers to 0.522 yuan (3.4 U.S. cents) per kilowatt hour. That compares with rates averaging about 10.4 U.S. cents in the U.S. and 12 U.S. cents in Japan, according to figures from the U.S. International Energy Agency.”

So let’s see… An American company could have its widgets manufactured in China and exported to the US (or anywhere else for that matter) and, denominating everything in dollars, save nearly 70% (67.3% to be more precise) on electricity costs alone!

AP goes on to report that:

“China’s power consumption [presumably “power” is synonymous with “electricity” here] rose nearly 16 percent in October from a year earlier, to 313.4 billion kilowatt hours, the fifth straight month of increases as the economy recovered from a slowdown early this year.

Earlier this week, Shanghai and other major cities reported brief shortages of power and natural gas due to surging demand due to dropping temperatures.

The government is on a long-term campaign to reduce energy waste, especially by industries. While cost-conscious families tend to skimp on electricity use, overall China uses four times as much energy as the U.S. per dollar of economic output, and more than 11 times that used in Japan.” [my stress]

I included the first couple of paragraphs for other interest – 313.4 billion kilowatt hours (why, oh why can’t journos use units in a sensible fashion? – what next? “million MWh”?) is 313.4TWh, i.e. about 10 times the UK’s electricity consumption (around 400TWh/yr, according to the source I used in a previous post).

“…let’s suppose France succeeds in reducing oil consumption. What else might they buy? If they buy manufactures, the ’embedded carbon’ in each $1bn worth will very likely be higher than in $1bn worth of oil! Why? Because manufactures require energy which will likely come from cheap indigenous (or Australian) coal, in China, say. Oil has a scarcity value because it is so useful. $1bn worth of oil might therefore contain less carbon than $1bn worth of manufactures!”

I remember thinking I should tone this down. I can’t remember exactly what I changed – I guess I put the “might” in the last sentence – but I obviously missed a “very likely”. Now, though, I’m beginning to wonder if I shouldn’t have been more committal!

What, for example, will California’s TV owners do with the money they save on their electricity bills? Maybe they’ll upgrade their set more often which will likely lead to more emissions per dollar than would have been incurred had they spent the money on California’s partially decarbonised electricity!

All these problems arise because we are so reliant on fossil fuels. Virtually everything we do – and in particular everything we spend money on – is likely to result in CO2 (and often other GHG) emissions to the atmosphere.

Today I just want to look at the problems with taxes on carbon. After all, now that the middle word has been dropped from “Copenhagen or bust”, it seems national policies, rather than a global emissions trading regime, are to be the focus, at least for the time being.

I worry whether my previous attempts to explain the Man in the Wardrobe Fallacy, here and then here, were too theoretical. So I’m going to try to work through the argument, step by step, with examples.

The Nature of Money

Too many people are failing to consider what money really is. One way of looking at money as a means of allocating resources. The price of a good is not, as many suppose, a fundamental quality, but reflects its supply and the demand for it.

Consider Geoge Monbiot’s recent piece on peak oil. Maybe its the late noughties zeitgeist, but again I feel obliged to express my disappointment, this time that George seems to think an “end is nigh” attitude to oil helps in the fight against global warming. Indeed, the first comment on his article, by NeverMindTheBollocks, has been deleted, but the second, by Daveinireland points out the problem:

“Isn’t the oil running out a simple so[lu]tion to global warming then? No oil means billions starve and the number of those pesky carbon footprints drops d[r]amatically.

Isn’t that what you want?”

In actual fact, if we want to stop catastrophic global warming, we can’t afford to use up oil the all, given that we’re also using all the gas we can find and most of the coal.

George’s predictions of chaos as oil output declines are also wide of the mark. For the activities that use oil – driving and so on – to decline globally, it would be necessary for oil output to decline faster than the rate of increase in efficiency in use of oil plus the rate of substitution of the use of oil, e.g. by the use of electric cars and (though it doesn’t help us on the GW front) the use of liquid fuels from coal (and indeed biofuels). Oil output would only decline by a few percent a year, max, which – given the EU thinks we can generate 20% of our energy supplies from renewable sources by 2020 – is of the same order as the rate at which we can replace it. And this doesn’t even take account of forced energy efficiencies.

Why do I say “forced energy efficiencies”? Because at some point, an individual’s spending on fuel is limited by the price. If they still want to get to work they’ll simply have to trade in the SUV for a hybrid. Money determines how the available fuel is allocated.

Of course, in a world of massive financial inequality, some will carry on driving their SUVs, whilst others are forced to use even cheaper means of transport, such as buses, trams or trains. But this is the fault of the economic system, not the oil supply. Since we’re using oil so inefficiently – maybe on average we get 50% fewer mpg than is possible with current technology – the supply could decline by at least 50% before it was necessary in energy rather than financial terms for anyone to reduce the distance they drive at all.

“a permanent oil shock would price food out of the mouths of many of the world’s people.”

If we assume the food supply does indeed decline, or at least fail to keep up with population growth, then it is indeed the case that food prices could rise if nothing else is done. But food, like gasoline, is being used unevenly and inefficiently. Many of the world’s people already have too little to eat, for economic reasons rather than because of limits on global resources. Further, many of those with least to eat are not part of the global market economy. Rather they are subsisting (or not) on small patches of land, relying very little on oil-based fertilisers and oil-powered machinery.

It’s the urban poor who are most likely to be affected. But in many countries, the prices of basic foodstuffs are regulated by the state, so problems will arise only when countries are no longer able to afford imports. Meanwhile the price mechanism will reduce consumption in developed countries, specifically those which are net importers of food. Here, though, minimum wages (and state pensions and benefits) are generally negotiable and index-linked, negating the effect of price rises.

Who would have to reduce their consumption, then? It’s a mixed, even slightly rosy picture, but it seems the burden will fall on two groups:
– those whose governments are no longer able to import sufficient food;
– those urban poor presently existing on slightly more than subsistence-level food supplies, who will become relatively poorer compared to those reliant on social or government safety-nets.

In other words, more people will be food-poor, but famines, as now, will be associated with collapsed governments and environmental or social crises.

The point I am trying to make is that money is simply a way of allocating resources. And there are other ways.

Food is so fundamental that you can’t naively apply simple supply and demand economics. In the UK, for example, food was rationed for a decade just over 50 years ago, well within living memory. In the event of a complete food-supply catastrophe (and actually I think a bigger threat than a slowly declining oil-supply is a major volcanic eruption which could reduce harvests for several years), I have no doubt we’d see rationing again.

The effect of a decline in global food supply is complex, but one tentative conclusion might be that it would be governments rather than the individuals themselves who ensure their populations have an adequate food supply. Or not.

“But things get tricky. The €4.3 billion ($6.39 billion) raised annually by the tax would actually be returned to taxpayers in the form of tax reductions or ‘green checks.’ A family living in an urban area, for instance, would get a break of €112 ($166.53) on their income taxes. A family living in the country, which presumably would mean higher carbon taxes because of the lack of public transportation, would get an even bigger reduction of €142 ($211.14).”

What amuses me most is that the French have decided that carbon consumption because of a rural lifestyle is somehow legitimate! Apparently we should subsidise those who have profligate lifestyles in rural areas – a ludicrous position that is also taken for granted on this side of La Manche. An intelligent policy would instead pass on the various extra costs arising from their inefficient lifestyle to those in rural areas to encourage more to adopt a less costly urban lifestyle.

But the real problem is that the money raised by the carbon tax is simply redistributed. Only two things have happened:
– the spending power of the poor has been increased at the expense of that of the wealthy;
– the price of highly carbon-intensive activities has been increased relative to less carbon-intensive activities.

The first effect could actually make the situation worse, as some of those who could not afford to (say) use their car often or heat their homes as much as they’d like, can no afford to do so. This could (in fact very likely will) outweigh the effect on the wealthy, who may simply save less of their money!

The whole policy therefore rests on the magnitude of the second effect. Will people switch to less carbon-intensive technology? There are at least two reasons why they might not and even if they did, this would not necessarily reduce global or even French carbon emissions:
– first, it’s often difficult to tell which option is least carbon intensive;
– second, there may be insufficient supply of renewable energy;
– third, consuming less fossil fuel will simply allow its price to fall, allowing others to consume more.

Let’s explore the third problem a little more. Take the example of the oil price which is set globally in dollars. If the French purchase less oil, its price will drop slightly and someone else – China, say – will be able to purchase a little more of it. France acting on its own cannot reduce global oil production.

But it’s worse than this. France can afford a certain level of imports, over a long period of time equivalent in value to their exports. So, if France earns on average $100bn a year in exports (let’s assume imports and exports are all priced in dollars), then, on average, it will import an annual $100bn worth of goods. Money can store value but ultimately must be spent – in itself it has no intrinsic utility.

The carbon tax has no effect on France’s trade position – if anything it will help them increase their exports, by promoting more efficient use of fossil-fuel imports – so they still have (at least) the same hypothetical figure of $100bn to spend each year.

Likely a similar proportion of the $100bn will be spent on fossil-fuel such as oil. But let’s suppose France succeeds in reducing oil consumption. What else might they buy? If they buy manufactures, the “embedded carbon” in each $1bn worth will very likely be higher than in $1bn worth of oil! Why? Because manufactures require energy which will likely come from cheap indigenous (or Australian) coal, in China, say. Oil has a scarcity value because it is so useful. $1bn worth of oil might therefore contain less carbon than $1bn worth of manufactures!

And it gets worse. Whatever France buys, even if it’s software, they’ll give their dollars to the producers, let’s say in India. And the producers will then be able to import oil. Or manufactures.

The Man in the Wardrobe Fallacy

The Man in the Wardrobe Fallacy is simply that an internal change in an economy – a redistributive tax on carbon, say – has no direct effect on the external effects of that economy, its ability to import fossil-fuels, for instance.

At the present time, supply-side constraints – the rate at which low-carbon energy is being rolled out – are limiting our ability to reduce fossil-fuel consumption and hence carbon emissions. When gigawatts of wind energy capacity are held up in the planning system, all carbon taxes will do is act as a redistributive tax, increasing economic equality (all else being equal).

And, mirroring the case of the likely effect of production capacity constraints on food consumption, economic equality is, sadly, not your friend when you are trying to reduce consumption of a resource. Think about it. Consumption of any resource is surely minimised when the poor majority are constrained by their finances (or access to the resource), and the wealthy minority by their appetites!

In the example of food, the response to a drop in supply would be to increase the numbers of the poor majority, that is, those constrained by their finances. The number able to eat as much as they want, whenever they want, would tend to decline.

In the example of fossil-fuels, redistributive effects – such as from taxes – tend to increase consumption, the reverse effect. Indeed, we can see on a global scale how the spurt of development over the last couple of decades, and especially since the start of the millennium – a massive equalising of global spending power – has led to an increase in, for example, demand for oil.

Successful strategies to reduce global carbon emissions must involve a limitation on overall emissions. Kyoto – with crucial terms dictated by the hyperpower of the time, the USA – was intended to lead to such limits. Copenhagen, forged in the new multi-polar world, will consist of no more than a series of unenforceable, and, in many cases, vague, national undertakings, and will be entirely ineffective.

Now it simply isn’t true that Lloyds haven’t advised the exact sum investors will have to “cough up” (though they could have been clearer). As I pointed out last time, it’s quite simple: Lloyds wants £13.5bn, which will be divided equally amongst the ~27bn shares in circulation. That’s ~50p a share. If you own 1000 shares you’re going to be asked to put in £500. How many new shares you’ll get and at what price each is yet to be determined.

This is actually a step forward in the organisation of rights issues. The problem is that when a company announces it is going to sell a lot of shares, the price tends to fall – supply and demand – since not every share owner will be able to and want to put more cash into Lloyds equity. By delaying the announcement of the price of the new shares until the last minute, Lloyds has somewhat reduced the risk of the share price falling below the rights issue price, which would be a disaster, since, if you could just buy shares in the market for a lower price, there would be no point taking up the rights issue. The under-writers would end up with all the new shares.

What worries me most about Collinson’s comment piece and Treanor’s Q&A is that they omit part of the case for participating in the rights issue. What I’m about to say should not be construed as financial advice, but there are obvious reasons why a company’s share price might be depressed ahead of a rights issue and that in general a rights issue may be a good opportunity to invest.

The key point is supply and demand for the shares, that is, precisely what Lloyds is worrying about and the reason for the confusion about the offer price for the new shares. Many investors – funds or individuals – may simply be unable to put more money into Lloyds shares. They may just not have the cash. Or, especially if they’re a fund, they may not want Lloyds shares to rise as a proportion of their portfolio. This could even be against the rules of the fund.

Of course, some investors, such as index tracker funds, may be compelled to increase their holding in Lloyds in line with the increase in volume of its equity. But it’s difficult to think of a fund that would be compelled to take up more than its share of rights.

Therefore, it’s often argued, a rights issue is a good time to buy, because there is a surplus of sellers of the stock.

As Jill Treanor points out, you can sell some or all of your rights in the market, for example, to raise enough cash to take up the rest of your rights, a practice known as “tail-swallowing”. Such selling activity will tend to make the rights cheaper. But it’s important to understand that if the price of the rights falls, then so does the price of the existing shares. The reason is the (arbitrage) opportunity to simply sell shares and buy the rights.

Example: To simplify a little, say Lloyds shares fall to 60p when rights have been given to all the shareholders. The rights might entitle you to buy new Lloyds shares for 40p each (so you’d get 5 for every 4 shares you held at the qualifying date for the rights issue) so should sell for about 20p each (since once you’d put in the 40p you’d receive a new share exactly equivalent to the existing shares). If so many people sell their rights that the price is not 20p but drops to (say) 18p, then someone could sell shares for 60p, buy rights for 18p, subscribe to the issue for 40p and make (60 – 18 – 40)p = 2p a share. Do this for a few million shares and you’re building up a tasty bonus pot! What happens when people sell the shares to buy the rights, of course, is that the share price tends to fall until the price of the shares and the price of the rights are aligned again.

So, according to this argument, it may be a good time to buy Lloyds shares, e.g. by subscribing to the rights issue.

It might also be worth noting that Lloyds stated that it will not pay a dividend for 2 years. This may be another reason why some investors (income funds) will not want to hold the shares, though they may already have sold their holdings in the stock.

Of course, there are many reasons why it could turn out to be a bad time to buy Lloyds. They might screw up. Or we might experience the dreaded double-dip recession. And if so many people decide it’s a good time to buy Lloyds, this will push up the price and make it a bad time to buy! Though it is the largest rights issue in the UK to date…

At the end of the day, investors must make up their own minds, and, as I say, I’m not providing financial advice. Patrick Collinson (or his editors) are bold enough to allow themselves a headline “Lloyds looking unattractive” (or “Lloyds rights issue looks distinctly unattractive” in the online version). I just feel investors might also want to take into account the argument that rights issues can be a good time to invest.

Disclaimer: I worked for Lloyds in the early 1990s and own some Lloyds shares.

November 6, 2009

I’m still reading “Carbonomics” and, whilst mulling over some of Stoft’s (plot spoiler alert) somewhat unconvincing arguments for a carbon “untax” (actually it’s just a regular tax, the un- is an attempt to circumvent the public perception problem), I’ve had a rather nasty thought.

The question is, do aggressive policies of high fossil fuel prices and/or high green energy subsidies or passive policies of low fossil fuel prices and/or low green energy subsidies most favour the development of renewable energy technologies? My argument assumes that in Europe, fossil fuels will be kept expensive due to taxes, carbon trading and so on and renewable energy will be heavily subsidised, whereas in US (& China etc) fossil fuels will remain cheap and there will be limited subsidies.

Obviously my assumption is an over-simplification. In particular, there are sectoral differences, with transport fuels particularly expensive in Europe. But I’m trying to develop a general argument here, so bear with me.

Now, high fuel prices (and renewable subsidies) will encourage the early development of alternatives. So we see, for example, early leaders in solar appearing in Germany and wind in Denmark. Risk-free profits are a wonderful incentive!

But what market conditions will encourage the large-scale roll-out of renewable energy technologies? Well, it’s competition that eliminates the least efficient and forces the survivors to up their game. And, I suggest, competition is going to be most intense where energy prices are lowest and subsidies the most difficult to obtain.

Consider. If, say, two wind power technology players start out and are successful in selling in their home markets, the US and Germany, which will most easily penetrate the other’s market?

The US company will definitely be able to sell in the tough conditions for renewable technology in the US. The German company, on the other hand, has demonstrated only that it can sell in the easier German market with a higher cost of carbon and feed-in tariffs.

Obviously each case is different, and lots of other factors come into play (I’ve assumed that subsidies and fuel prices are higher in Germany than in US, which may not be the case for every renewable technology), but the company accustomed to easy sales is, in general, going to find it much more difficult to compete than the company that has had to fight harder.

The argument is related to the first-mover problem. It may not always be the case that the first company in a market ends up dominating it.

This is all rather awkward, don’t you think?

What it suggests to me is that the best policy at a national level must be not to tax fossil-fuels, nor to subsidise renewable technologies, but to limit fossil-fuel consumption and encourage renewable energy generation other than by price.

The best policy globally is to progressively reduce total use of fossil-fuels, thereby ensuring a level playing-field.

At the moment, no global policy is in place. It’s every country for itself, though there are rewards for reducing fossil-fuel dependency:
– greater energy security;
– a stronger position when a global deal is finally done, as it must eventually be if we’re not all to fry;
– the long-term economic advantage of lower cost – maximised if energy is produced most cost-effectively;
– the potential to export technology (and even energy, e.g. in the form of electricity), similarly maximised when the technology developed is most efficient.

For a country that wants to switch to home-grown renewable energy, policies that make sense therefore include:
– a progressively tighter limit on carbon emissions, implying internal emission trading;
– mandating the use of increasing proportions of renewable energy;
– removing obstacles (e.g. dysfunctional planning processes) to the production of renewable energy;
– a level playing-field for the various renewable energy technologies.

Policies that don’t make sense are those that support over-priced renewable energy:
– carbon taxes (where these price fossil-fuels more highly than necessary to achieve the desired rate of renewable energy uptake);
– feed-in tariffs, that provide guaranteed profit for renewable energy production, regardless of whether or not it is more expensive than other available technologies. Paying ~35p/kWh for electricity generated by solar PV on UK roofs, which I understand may well happen, must be one of the worst renewable energy policies that could possibly be devised.

Of course, whether you use taxes or emission limits supported by carbon-trading, there’s still the risk that if you try to go too fast you’ll spend a lot of money on renewable energy technologies that later turn out to have been very poor value for money. Another reason for insisting on global policies.

In my simplified world, renewable technologies that can survive without subsidies or inflated fossil-fuel prices are the ones that are ultimately going to dominate. Maybe this favours US and Chinese companies, even though Europe is adopting the most aggressive emission-reduction policies. Isn’t economics unfair?

“…while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades…”

Roubini, characteristically, worries most about the unwinding of the dollar carry trade.

I don’t know, I think there is a wrinkle here, which is that the US dollar can’t actually depreciate, not fully, anyway, because of China’s dollar peg. Therefore it hasn’t got so far to snap back in a panic. Sure, there can be some unwinding if the market suddenly perceives emerging markets to have become overvalued, more risky or growth less certain. This damping of the dollar’s movement makes dollar-funded carry trades less risky than they would be otherwise. This is not good, because it will allow bubbles to inflate even more than would otherwise be the case.

Roubini writes as if carry trading investors are making a currency gain by borrowing dollars, over and above emerging currency and other market movements. That’s only true if your accounting currency is neither dollars, nor, say, sterling, which is hardly appreciating nor going to appreciate against the dollar (and also appears to meet the criteria for a carry-trade funding currency). In fact, it’s only really true if your investors want euros or possibly yen at the end of the day, though one wonders why they don’t just borrow in those currencies to reduce the risk, if they believe a flight to safety would favour the dollar.

Since the dollar’s decline is primarily taking place against the euro, it follows, incidentally, that as I argued last time, the next phase of the game will be characterised by a eurozone trade deficit as well as a US and (not that it’s very significant to the rest of the world) a UK one.

Martin Wolf worries – to a very deferential Tech Ticker audience – that eventual US rate rises will have a dramatic effect. Sure. But – since interest rates do most of their work in curbing inflation through their effect on the foreign exchange rate – that simply means they won’t have to rise very much, doesn’t it? Of course, this will help to fuel further borrowing in US…

It might be worth comparing the dollar carry trade to the yen carry trade. The crucial difference is that the yen carry trade was/is inherently risky, because the yen has, for decades, been undervalued, given Japan’s persistent trade surplus (increasing again in 2009).

But we are in a fairly unusual situation of a reserve currency doomed to eventual decline: we can borrow cheaply in dollars because of its reserve status, but, as its status as a reserve currency diminishes, it will be seen to be fundamentally overvalued because of its trade position and the vast overhang of dollars already in foreign hands. So borrowing in dollars is something of a one-way bet – you don’t have to worry that your fortune has the Ponzi quality of depending on everyone else continuing to want to borrow in dollars. The dollar isn’t going to snap back up – notwithstanding a temporary recovery during the next major crisis – because its value is already being held up by central banks wanting to buy them. Rather, the dollar’s value can be expected to decline over time as it is replaced (by a mix) as the world’s reserve currency. Compared to the yen carry trade the dollar carry trade is a bargain, risk-wise. No wonder emerging market equities are breaking records!

Ambrose Evans-Pritchard is always an entertaining read. He writes today that the next crisis could be a Japanese default. But Japan’s trade surplus must make this unlikely. All they’ve got to do is divert some of Japan’s private savings to the public purse. Maybe a little easier said than done, of course, but there’s still plenty of scope. Of course, if they let their national debt rise from 2 to say 3 times GDP, it could start to get tricky to service…

“If China continues to follow the Japanese template, the end of the dollar peg will be the trigger event [for the “final manic stage” of the bubble], setting off a Godzilla-sized credit binge.”

There also seem to me to be similarities with the Great Crash of 1929. We are in a fairly unusual situation of a reserve currency doomed to eventual decline, but it is not a unique situation. Didn’t the UK coming off the gold standard in 1925 convince investors that the dollar was the place to be? Blaming Churchill (who took the decision) is wrong-headed. The problem was that the peg existed in the first place, not that we came off it. It might be hitting the ground that does the damage, but the problem is trying to float in the air in the first place.

It seems to me the sooner China appreciates its currency the less painful it will be for everyone. Especially as, the longer Chinese economic growth exceeds that elsewhere, the bigger the relative size of its economy and the greater the imbalance caused by the undervaluation of its currency against the dollar. As I said when I started trying to get my head round all this, currency pegs are a very bad idea indeed. You may be able to market the buck, but you can’t buck the market.